Dada Nexus: Lack Of Catalysts Notwithstanding, Appealing Valuations (NASDAQ:DADA)

Elevator Pitch

I rate Dada Nexus Limited (NASDAQ:DADA) stock as a Hold.

Previously, I reviewed DADA’s Q2 2023 financial results in my prior August 21, 2023 update. My latest article draws attention to Dada Nexus’ upcoming third quarter results release.

DADA’s valuations are enticing, but there is an absence of near-term catalysts to re-rate the company’s shares. Specifically, I think that Dada Nexus’ upcoming Q3 earnings announcement will be a non-event, considering my expectations of in-line results. This explains why I maintain a Hold rating for Dada Nexus.

The Market’s Expectations Of DADA’s Q3 Financial Performance

Dada Nexus is expected to disclose the company’s financial results for the third quarter of this year in mid-November, and the sell side thinks that DADA’s Q3 performance will be inferior to what the company delivered for the second quarter.

The consensus financial forecasts (source: S&P Capital IQ) point to DADA’s top line expanding by +20.5% YoY from RMB2,380.2 million for Q3 2022 to RMB2,869.1 million in Q3 2023. As a comparison, Dada Nexus grew its revenue by +23.2% YoY and +41.1% YoY in Q2 2023 and Q3 2022, respectively. Moreover, the current consensus Q3 2023 top line estimate of RMB2,869.1 million for DADA is below the mid-point of the company’s third quarter revenue guidance at RMB2.9 billion.

In other words, the sell side sees Dada Nexus witnessing revenue growth deceleration in Q3 2023 and expects the company’s actual third quarter top line to be lower than what the management previously guided for.

On the other hand, the market anticipates that Dada Nexus will reverse from a non-GAAP adjusted net profit of +$8.4 million for Q2 2023 to suffer from a normalized net loss of -$270,000 in Q3 2023 as per S&P Capital IQ’s consensus data.

At the company’s earlier Q2 2023 results briefing, DADA had noted that it aims to “grow the bottom line in a healthy way” going forward after achieving its “first ever positive adjusted net income” in the second quarter of this year. As such, it will be a disappointment if Dada Nexus turns loss-making again in Q3 2023 as per the analysts’ consensus financial estimates.

In a nutshell, the market has a dim view of Dada Nexus’ third quarter results with expectations of DADA reporting slower revenue growth and suffering from losses again.

My Prediction Is That Dada’s Third Quarter Results Will Be In Line With Expectations

I am of the opinion that Dada Nexus’s actual Q3 performance will be similar to what the market expects.

I have identified two key factors which could have led to DADA registering losses for the third quarter of the current year.

The first factor is high rider costs resulting from difficult weather conditions.

An August 8, 2023 NBC News report noted that “summer in China so far has been a season of extremes, with the country lurching between stifling, unrelenting heat and heavy, monsoonal rainfall.” It would be reasonable to assume that DADA would have paid a larger amount of subsidies to riders in Q3 2023 as weather conditions became more extreme in China during this period. This means that Dada Nexus’ third quarter bottom line might have likely been hurt by an increase in rider expenses associated with extreme weather.

The second factor is the increase in selling and marketing expenses relating to specific brand building campaigns and projects.

Earlier, Chinese financial news portal SINA reported (translated using Google Translate) that DADA’s JD Daojia or JDDJ platform “officially launched its ‘Double Ten Billion Brand Plan’ for brand owners” on September 7 this year. In specific terms, Dada Nexus is planning to increase its investments in JDDJ to help a number of its brands on its platform to achieve higher annual sales of above RMB1 billion or even RMB10 billion. As a reference, DADA describes JDDJ as “one of China’s largest local on-demand retail platforms” in the company’s media releases.

My view is that DADA’s financial performance will be weaker in Q3 2023 vis-a-vis Q2 2023, just like what the analysts are predicting. Therefore, I don’t think that Dada Nexus’ Q3 2023 results disclosure will act as a positive re-rating catalyst for the stock, even though DADA’s valuations are undemanding as detailed in the next section.

Dada Nexus’ Valuations

DADA’s stock price dropped by -57.2% in 2023 year-to-date, and Dada Nexus’ shares appear to be undervalued.

Dada Nexus is currently trading at below 1x consensus forward next twelve months’ price-to-sales, or 0.61 times to be exact, as per S&P Capital IQ data. DADA’s consensus FY 2023-2025 top line CAGR estimate is a healthy +21.4%, so it wouldn’t be farfetched for Dada Nexus to trade close to 1x price-to-revenue in time to come.

Also, assuming that DADA can gradually improve its profitability over time, the sell-side analysts estimate that Dada Nexus’ FY 2025 normalized net income will be as high as RMB1,270 million (source: S&P Capital IQ). This translates into an attractive consensus forward FY 2025 normalized P/E multiple of just 6.7 times for DADA.

Closing Thoughts

Dada Nexus’ shares are cheap based on the forward price-to-sales and normalized P/E multiples. But I don’t think the upcoming Q3 2023 results announcement is the catalyst that investors are waiting for. In that respect, a Hold rating for DADA is justified.